A tale of two currencies: Inside Zimbabwe’s messy money

Harare- Its 13:45pm in the Reserve Bank of Zimbabwe’s auditorium, an oval shaped room in the basement of the monolithic and imposing brick and mortar structure on Harare’s busy Samora Machel highway. The central bank chief John Mangudya in the next 45 minutes will present his monetary policy. It’s his second monetary policy statement this financial year.
And economists and analysts are not holding their breathe. Since Zimbabwe’s adoption of the United States dollar in 2009 after a runaway inflation that rendered its currency useless, he has largely been devoid of basic monetary policy tools to steer the economy in his intended direction should the need arise.
Traditionally, monetary authorities use a combination of interest rate, exchange rate and money supply to achieve an economic out turn they desire.
When the economy stalls and the central bank wants to stimulate economic growth, it buys government bonds or issues new money. This lowers short-term interest rates and increases the money supply. This strategy loses effectiveness when interest rates approach zero, at which point banks have to implement other strategies to kick start the economy.
Another strategy they can use is to create an environment that enables commercial banks to lend money to the private sector and stimulate production.
In the same room two years ago, Mangudya had announced the introduction of bond notes, a currency he claimed had a par value to the US unit insisting he will resign from his position should his plans fail.
Fast forward to present day, the bond notes and all electronic balances have been discounted by as much as 100% against the greenback. With a limp, the result of an automobile accident years ago, Mangudya saunters into the room to present what he says would be a response to 95% of the country’s economic problems.
“I believe this a response to 95% of the problems we have,” he says.
Under his watch, a total US$2 bn has been externalised, a euphemism for illegal movement of hard currency to offshore destinations, often blamed as the root cause of cash shortages in the economy.
He announces that he secured $500mn worth of import facilities from various financiers.
Zimbabwe relies on imports annually for fuel and some food stuffs such as maize, wheat and soya beans.
A total $80 mn is spent on fuel, he says every month.
The country’s balance of payment position is also negative with the Southern African country import more than its export thanks to low production and under investment. In the financial to December Mangudya said.
Between January and November 2017, Zimbabwe’s imports amounted $4.9 bn, reflecting a trade deficit
of $1.4bn. Zimstat, a government statistical department’s figures show that during the period under review, goods worth $2.2 bn were exported to South Africa while imports from the neigbouring country amounted to $2 billion.
However, the elephant in the room, currency problems, would be ignored if Mangudya’s comments to Bloomberg TV last week are anything to go by. The reforms will not happen until after three years, Mangudya said.
He admitted the country’s current economic fundamentals were weak, and underscored the need to ensure both business and consumer confidence improves, fiscal imbalances that are bringing pressure to bear on the financial-services sector are reduced, and the state is able to raise foreign loans.
“When those things are done, then you can have your local dollar,” he said. “Within the next three to five years we will be able to achieve what we want to achieve on the currency reforms.”
But at the end of his presentation the key takeaway for those who had attended and the millions watching on TV, the central bank had technically de-dollarised the economy by introducing a local currency bank accounts, which will trade in electronic transfers and bond notes only and creating a new Foreign Currency Account (FCA) one.
With immediate effect, banks were ordered to create nostro accounts for foreign currency transactions (nostro FCAs), which will run separately from existing bank accounts, now limited to RTGS (real time gross settlement) transactions and bond notes only.
The measures, which will technically de-dollarise the economy and reduce existing FCAs to local currency accounts, take effect on October 15. He said he was also negotiating with financiers for a $500 mn facility to guarantee the accounts to ensure that on demand clients get hard currency.
Essentially, the currency he claimed was at par in terms of value with the US unit, was not worth as much anymore.
Among other measures, Mangudya moved to eliminate arbitrage opportunities in the market and vowed to mop up excess liquidity in the economy.
He said the central bank had also secured import facilities amounting to $500 mn.
Mangudya also said foreign truckers would pay for fuel in hard currency.
His boss, Mthuli Ncube, the new Finance minister, conceded they were confidence issues relating to the FCA accounts.
A day after the announcement, the stock market’s mainstream index went 5% as investors sought refuge in stocks.
Analysts see those with local currency balances rushing to preserve value. And equities is a sure bet.
It seems, the central bank’s move could leave a trail of financial ruin in its wake given the massive devaluation of the currency in the market or could be a backdoor return to the US dollar.